How to Create a 100+ Year Company

1. How to Create a 100+ Year Company

2. Overview • There are some timeless principles to building a great company. Apply these principles and you’ll get greatness. • Greatness does not lie in accounting, cost cutting, or the pure profit motive. It lies in building a company’s sense of purpose around core values that give work meaning. • There are principles that will guide you into building something bigger and more lasting than yourself. If you want to leave a legacy, this is what you must do. • All this information is rooted in rigorous research. • Why on earth settle for creating something mediocre that just makes money when you could create something that makes a lasting contribution as well. It takes the same amount of time and is more fun and rewarding. Those who create a lasting contribution make more money in the end as well!

3. Note These Points • The Silicon Valley Paradigm of getting a good idea, raising venture capital, growing rapidly, and then selling out or going public … fosters impatience and a rise in social instability. Many of those “high tech” companies which were “built to flip” are dead. • Success based on a great idea is like telling perfect time without a watch, whereas putting together and maintaining a company that succeeds over time is like building a clock that runs forever. • A great company does not need charismatic leaders or fantastic product ideas. It needs a commitment to greatness and a process to get there. That’s what I’m trying to teach you. • Do you build a product or a company? The constant stream of great products and services from highly visionary companies stems from them being outstanding organizations, not the other way around.

4. You Can Do It You can improve your organization’s position, stature, performance … and perhaps even become “GREAT” … if you consciously apply the framework of ideas I show you. These are the “secrets to success” of the 100-year companies.

5. Characteristics of Great Companies • Premier company in its industry • Widely acknowledged as “the Best” by knowledgeable business people • Makes a lasting impression on the world • Lasts several generations • Goes through multiple products and life cycles

6. Common Misconceptions • You do not need a celebrity leader • Executive pay does not correlate with going from being good to being great • Strategy does not separate the good from great • You must focus on what NOT TO DO as well as what TO DO • Technology accelerates change but it does not cause a transformation of the company • M&A play no role in igniting a company’s transformation to greatness • Good-to-Great companies are not necessarily in great industries

7. 10 Myths of Great Companies • You need a “great” idea to start • You need a “charismatic” leader • Their first objective is to maximize profits • You need a particular certain set of core values • Change is the only constant thing • You must “play it safe” and be risk adverse • They are a great place to work for “everyone” • Their best moves are made through “brilliant planning” • They should hire “outside CEOs” to bring about fundamental change • They focus on “beating the competition”

8. The Myth of Needing a Great Idea • Be a Builder of a Clock (organization) that keeps running, rather than a genius perfect Time Teller • Just Get started ... and find your way • Business school teaches great idea, great marketing plan, window of opportunity - nope! • The ultimate creation is the company, not the product or idea - so put your energies into trying to create an organization and design an environment conducive to great product creation (leaders die but great companies last)

9. Examples ... • HP: urinal flusher, telescope clock drive, fat reduction shock machine, anything • Sony: rice cooker, tape recorder (failed), heating pads • HP’s creation wasn’t the calculator or oscilloscope but the company and HP way • Masaru Ibuka’s greatest product was not the Walkman or Triniton but the Sony company and what it stands for • Walt Disney’s greatest creation was not any one movie but the ability to make people happy • etc.

10. The Myth of the Charismatic Leader • The great leader theory does not explain the difference between good and great companies • 3M, P&G, Sony, Boeing, HP, Merck, … • The continuity of great leadership comes from great organizations • Great leaders are architects and clock builders, and give their associates a chance to make a name for themselves and show what they can do - fanatically driven to produce sustained results and workmanlike diligence • American Constitution - Thomas Jefferson, James Madison and John Adams were organizational visionaries; same for the lawgivers of Athens and Sparta

11. Great Leaders = Professional Will + Personal Humility • They transform personal ambition into ambition for the company • They are ordinary people producing extraordinary, superb results; have a dedication to making anything they touch the best it can be … yet are humble and modest, never boastful • Demonstrate unwavering resolve to do whatever must be done, no matter how difficult, to produce best long term results … but act with quiet, calm determination and motivate through inspired standards rather than charisma • Their goal is to build an enduring great company … they channel ambition into the company & not the self, and set up the next generation to succeed even more than they did • They look in the mirror for blame (never others or bad luck or the environment) … and give the credit for success to others

12. Having the Right People • Great Leader: • First WHO - get the right people, build the right team (the right people do the right things and best results regardless of the incentive system) • Then WHAT - with the right people, figure out the path to greatness • “Genius with 1,000 Helpers” • First WHAT - set a vision and road map • Then WHO - enlist a crew of “helpers” to make it happen

13. The “Genius with 1000 Helpers” • The myth of individual genius is destructive … we think we have to do all the hard work ourselves • The most successful people rely on the help of other people • Surveys show partnerships do better than single ownership (2X survival rate, grow faster, higher profits/person, last longer) • If “2 heads are better than one,” 3 heads … • A partnership is like a marriage without sex, so choose your partners as you would evaluate a wife

14. Selecting People - get the Gene Pool Right • Rule 1: when in doubt , don’t hire but keep looking • you cannot grow revenues faster than your ability to get good people to implement that growth and maintain company greatness • Rule 2: when you need to make a people change, do it ! • If you feel you need to tightly manage someone, you know you hired the wrong person! • If it were a hiring decision, would you hire them again? • If they tell you they are leaving, would you feel disappointed or relieved? • Rule 3: put your best people on your best opportunities, not your biggest problems • Rule 4: people are not your most important asset, the “right” people are your most important asset, and right often has to do with character

15. Purpose beyond profits Fixed core ideology Conservatism around the core Clear vision/sense of direction BIG GOALS Managers steeped in the core Ideological control Tight culture (cult-like) Long term investment Visionary, futuristic Organization aligned with a core ideology Pragmatic pursuit of profits Vigorous change and movement Bold, risky moves Groping and experimentation Incremental evolutionary progress Managers that induce change Operational autonomy Ability to change and adapt Short term performance demands Super daily execution Organization adapted to its environment You Can Balance Opposites

16. Hedgehog Concept The fox knows many things, but the hedgehog knows one big thing. • Don’t be scattered, diffused, moving on many levels • Those making the biggest impact (Freud, Einstein, Marx, Adam Smith) concentrated on one thing and simplified it • 3 Things: • Best in the world at: “I feel I was born to be doing this” • Economic Engine: “I get paid to do this? I am dreaming!” • Passion: “I look forward to getting up and going to work and really believe in what I’m doing”

17. The Hedgehog Concept • What can you be the best in the world at? (otherwise you can be successful but not great) Stick to it. Doing what you are good at will only make you good but focusing on what you can potentially do better than any others --> you’ll become great. • What drives your economic engine? Profit-per-x, cash flow and profitability ... What one ratio do you systematically want to increase over time to have the greatest impact on your economics? Find a metric. • What are you deeply passionate about?

18. Nucor Steel is an Example of the Hedgehog Concept • Economic denominator - profit per ton of steel • Become the best in the world at harnessing culture and technology to produce low cost steel • Passion for eliminating class distinctions and aligning management and workers

19. Examples of Economic Denominators • Abbott: profit/product --> profit/employee • Fannie Mae: profit/mortgage -> profit/mortgage risk level • Gillette: profit/division -> profit/customer • Nucor Steel: profit/division -> profit/ton of steel • Philip Morris: profit/sales region -> profit/brand • Walgreens: profit/store -> profit/customer visit • Wells Fargo: profit/loan -> profit/employee

20. Culture of Discipline • The purpose of bureaucracy is to compensate for incompetence and lack of discipline, but these problems go away if you have the right people in the first place • Most companies build bureaucratic rules to manage the small percentage of wrong people, which drive away the good people • REMEDY: create a culture of discipline • responsibility accounting • freedom and responsibility within a framework • fill that culture with self-disciplined people willing to go extreme lengths to fulfill their responsibilities • don’t confuse discipline with tyrannical disciplinarianism • adhere with consistency to the Hedgehog Concept • a culture of discipline, not discipline through sheer force

21. You Can’t Fix What’s Broken With Good Policies • Fixing problems with policies sometimes works, and sometimes creates lots of conflicting policies • When a problem arises, instead of a new policy try this: • Contact the source of the reported problem and get some idea of the evidence there is a problem • If the evidence is legitimate, contact the person responsible for solving the problem and ask them if they know about it, and how much they know • Then ask them to “copy” you their solution (resist the urge to suggest a solution or create a new policy) which ensures that the problem gets solved, the solution makes sense, and it makes sense in the context of the whole business and its operations • This approach recognizes that good employees don’t need policies to do good work, and bad employees will waste time and screw things up no matter what policies you write

22. Culture of Discipline • You want to create a culture full of self-disciplined people who take consistent action consistent with the 3 Hedgehog principles • If you get the right people --> you don’t need bureaucracy • People adhere to a consistent system; people have freedom and responsibility within that system • It’s Not about Action -- Get disciplined people who engage in disciplined thought and then take disciplined action • Great companies appear boring from the outside, but inside they’re full of people with intensity and diligence • The more you stay within the 3 principles, the more will be your opportunities for growth • Once-in-a-lifetime opportunities are irrelevant unless they fit within the perimeter of the three principles • Stop doing lists are more important than To Do lists

23. You Need a Council • Purpose: Understand issues facing an organization • Meeting every week or two (ex. meet for lunch twice a week), thisCouncil provides a small team of people in the firm sufficient "jawbone" or talk time to dialogue about the direction, priorities, and challenges of moving the business forward.  Without this informal talk time, it's hard to figure out the important stuff. • Argue, debate in search of understanding, not ego • Members must have different perspectives • The council is a standing body • Mentors and the Board of Directors are similar but not the same • Final responsibility rests with leader, not consensus (since consensus decisions are often not intelligent)

24. Great Companies Focus on More than Just Profits • Merck - free river blindness medicine, streptomycin after WWI to Japan to eliminate tuberculosis: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.” • Ford - criticized for injecting spiritual principles into business (go after reasonable profit, enable lots of people to enjoy a car, twice industry pay rate) • Profitability is necessary, but only a means to a more important end; oxygen is important for life, but not the point of life, but without it there is no life. • Like-minded people come together for the same core ideology • HP - bigger was better only if it made a contribution • Johnson&Johnson - to alleviate pain and disease • Boeing - to pioneer aviation • Find the RIGHT PRAGMATIC SOLUTION in line with their CORE IDEALS

25. Core Ideologies - There is No “Right” One • Customers - Johnson&Johnson and Wal-Mart (Sony and Ford - no) • Concern for Employees - HP and Marriott (Disney and Nordstrom - no) • Products and Services - Disney and Ford (IBM, Citibank - no) • Risk Taking - Sony and Boeing (HP and Nordstrom - no) • Innovation - 3M and Motorola (P&G, American Express - no) • The critical issue is not whether a company has the “right” core ideology, but whether it has a core ideology that gives guidance and inspiration to people inside that company!

26. A Core Ideology Must Permeate the Company • To create a great company, you need a core ideology • Indoctrinate employees around the core ideology -- you want to create a cult like following • Select the company’s senior management based on their skill and their fit with that core ideology • Align your goals, strategy, tactics and organizational design around that ideology

27. Core Ideology = Core Values + Purpose • Core Values = a small set of enduring guiding principles you never compromise for financial gain or short term expediency • Purpose = a fundamental reason for existence beyond just making money that always guides the firm

28. Examples of Core Purposes • Israel - to provide a secure place on Earth for the Jewish people • Walt Disney - to make people happy • Sony - to experience the joy of advancing and applying technology for the benefit of the public • Merck - to preserve and improve human life • HP (Hewlett-Packard) - to make technical contributions for the advancement and welfare of humanity • Cargill - to improve the standard of living around the world • 3M - to solve unsolved problems innovatively

29. Preserve the Core But Go for Progress CoreBig Goals

30. Preserve the Core But Push for Progress A company must be willing to change everything about itself (tactics, strategies, costs, products) except its basic beliefs or philosophy of doing business Ex. IBM - blue suits, white shirts, IBM360 … all gone • 5 Strategies • BIG goals: challenging, visionary projects that stimulate progress • Cult-like Cultures: great to work there if you fit in • Try a lot of stuff and Keep what works: experiment/failure OK • Home grown management: promote from within • Constant self-improvement: it’s never good enough

31. 6 Big Factors • Special Leadership - quiet, unassuming, no self-importance, humility but intense professional will • First Who …Then What - get the right people, get rid of the wrong people, put the right people in the right spots • Confront the Brutal Facts But Never Lose Faith - Stockdale Paradox • The Hedgehog Concept - what you can be the best in the world at + what you are deeply passionate about + what drives your economic engine • A Culture of Discipline - with disciplined people, you don’t need a bureaucracy

32. Confront the Brutal Facts People will filter the brutal facts from you -- “Yes” men You need to Create a climate where people can be heard and the truth is heard: 1) Lead with Questions, not answers 2) Argue, Debate, Dialogue over strategy and what’s best for the company - evolve over agonizing arguments 3) Conduct autopsies without blame, don’t hide errors 4) Build “red flag” mechanisms Victims - either permanently dispirited, get their life back to normal, use it to define themselves Stockdale Paradox - not optimism

33. BIG Goals • A goal that grabs people in the gut and gets juices flowing, a big finish line so clear that it doesn’t need to be explained; Kennedy “go to the moon” • “This is unreasonable” but we think we can do it; a goal outside the comfort zone • Self-confidence bordering on arrogance • The goal is important, not the leader (otherwise after the leader there is a stall), and it should be bold and exciting by itself • The goal should be consistent with the core ideology • Have follow-up BIG goals (so no “we’ve arrived”)

34. Cult-like Cultures If you’re not willing to enthusiastically adopt the HP way, you don’t belong there; if don’t believe in wholesomeness, aren’t clean cut and believe in magic, you don’t belong at Disney; if you don’t want to join the quality push at Motorola, you don’t belong there; if you question the right of individuals to make their own decision, then you don’t belong at Philip Morris.

35. Characteristics of Cults • Fervently held ideology • Indoctrination • Tightness of fit • Elitism Companies screen out those who don’t fit in with their ideology and create heroic mythologies about individuals who exemplify the corporate ideology

36. How to Establish the Cult-Like Mentality • Training programs with company values • internal universities and training centers • on-the-job socialization • exposure to persuasive mythology of “heroic deeds” • constant emphasis on corporate values • tight screening process • incentive/advancement programs that fit in with the core • awards, contests, public recognition to reward those who display great effort consistent with the core • tolerance for honest mistakes that don’t breach the core • celebrations that enforce success

37. Try a Lot of Stuff and Keep What Works • Test, test, test, test, test - fail and fail FAST - give it a try and fast • Accept that mistakes will be made: Darwin: multiply, let the weak die and the strongest survive • Corporations are evolving species, no one gets 100% on every test - species evolve (no final blueprint) - use evolution to get to the top • Try lots of different approaches and stumble upon something that works • Small opportunities, incremental mutations grow into major unanticipated strategic shifts • No decision is sacred • Give people the room they need & allow people to be persistent • Build the ticking clock

38. Home Grown Management • It is not the quality of leadership that separates the visionary companies from the comparison companies. It is the continuity of quality leadership that matters--continuity that preserves the core. • The key is to develop and promote insiders who are highly capable of stimulating healthy change and progress while preserving the core. Give them responsibility and training.

39. Good is Never Enough • How can we do better tomorrow than we did today? • Great companies don’t achieve their position because they have superior insight or special secrets, but because they are so DEMANDING of themselves • Continuous improvement is an institutionalized habit, a disciplined way of life • Self-improvement includes: process improvement, long term investments for the future, investing in employee training, adopting new technologies • P&G method - to make sure the company didn’t become fat, happy and complacent, it created a system of internal competition of brand management - it instituted discomfort mechanisms

40. Merck: consciously yield market share as products became low-margin commodities, forcing it to create new products to grow and prosper • Motorola: innovate or die mechanism similar to Merck • GE: internal discomfort instituted through special employee meetings where managers cannot participate but must make decisions on the spot • Boeing: “eyes of the enemy” - managers assigned to develop strategy as if they worked for a competing company • Wal-Mart: beat yesterday strategy • Nordstrom: sales per hour rankings that rate you against your peers; no absolute standards that allow you to relax • HP: refused to take on long term debt forces company to learn how to internally fund its growth rate

41. Alignment to the Total Picture • There’s no one single program, strategy or tactic -- it’s a complete system of everything interpenetrating • Focus on small stuff, not just the big picture; day-to-day is the small stuff • Cluster your mechanisms: Ford quality control + employee involvement programs + mgmt training programs + promotion based on management skills; Merck hires top scientists + allow them to publish + allow them to collaborate with outsiders + dual track • Get rid of mis-alignments: your incentive system should reward behaviors in line with your core values, goals and strategies should align with your core values • Keep the core while inventing new methods

42. Core Ideology • Leaders die, products become obsolete, markets change, new technologies emerge, management fads come and go, but core ideology endures as a source of guidance and of inspiration • Core ideology is the bonding glue that holds an organization together as it grows, decentralizes, diversifies, expands

43. Core Values • The organizations enduring guiding tenets--a small set of timeless guiding principles that require no external justification; they have intrinsic value and importance to those inside the organization • Finding core values • If the circumstances changed and penalized us for holding this core value, would we change it? • Imagine you have to duplicate the best attributes of your organization on another planet but can only send 5 people--who are the best exemplars of your company’s core values (your genetic code)--ask them to elucidate it • A clear ideology attracts people to the company whose personal values are compatible with company core values

44. Great Managers

45. Test Yourself Against the Best Managers 1. As a manager, would you rather have an independent aggressive person who produced $1 million in sales, or a a congenial team player who produced half as much. Explain your reasoning. 2. You have an extremely productive employee who consistently fouls up the paperwork. How would you work with this person to help him/her become more productive? 3. You have two managers. One has the best talent for management you have ever seen. The other is mediocre. There are two openings available. The first is a high-performing territory and the second is a territory that is struggling.Neither territory has reached its potential. Where would you recommend the excellent manager be placed? Why?

46. Ask the Employees: These 12 Questions Measure the Fundamental Strength of the Workplace 1. Do I know what is expected of me at work? 2. Do I have the right materials and equipment I need to do my work right? 3. At work,do I have the opportunity to do what I do best every day? 4. In the last 7 days, have I received recognition or praise for doing good work? 5. Does my supervisor,or someone at work, seem to care about me as a person? 6. Is there someone at work who cares about my development?

47. 7. At work, do my opinions seem to count? 8. Does the mission (purpose) of my company make me feel my job is important? 9. Are my co-workers committed to doing quality work? 10. Do I have a best friend at work? 11. In the last 6 months, has someone at work talked to me about my progress? 12. This last year, have I had opportunities at work to learn and grow? • People join companies for various reasons, but [1] how long they stay and [2] their productivity (how productive they are) is determined by their relationship with their immediate supervisor. It’s better to work for a great manager in a lousy company than a terrible manager in a great company.

48. Great Managers Know the Following Secret Story of the frog and the scorpion crossing the river. “I can’t help it … it’s my nature.” People do not change very much. They resist change. So don’t waste time trying to put into them what’s left out of their character. Try to draw out of them what is already inside them. That’s a hard enough job just by itself.

49. A Great Manager Should Do 4 Activities Extremely Well (1) select a person (2) set expectations (3) motivate the person (4) develop the person A manager’s function is to act as a catalyst that speeds up the reaction that creates the desired end product. The catalyst role has 4 main activities:

50. Here’s how Great Managers do those 4 Things (1) Selecting a person - they select for TALENT, not simply experience, intelligence, or determination (2) Setting expectations - they define the RIGHT OUTCOMES but not the right steps (3) Motivating people - they focus on STRENGTHS, not weaknesses (4) Developing people - they help him find the RIGHT FIT, not the next rung on the ladder